Incomplete pass-through of fuel rates may fan inflation: Pranab

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Making a case for aligning domestic fuel rates with international crude prices, the government on Wednesday cautioned that incomplete pass-throughs may push up its subsidy costs and fan inflation.

"Going forward ... incomplete pass-through of higher crude prices will have an impact on aggregate demand through higher subsidy expenditure, which is expansionary and can add to inflationary pressure," said an official statement, quoting Finance Minister Pranab Mukherjee.

Overall inflation in May was at a high of 9.06 per cent, although food inflation for the week ended June 18 moderated to 7.78 per cent.

While the government has already brought petrol rates on par with global crude oil prices, diesel, kerosene and cooking gas are still under administered price mechanism.

"There is a significant suppressed component of inflation as the increase in international crude oil prices has not been passed on completely despite increase in domestic administered oil prices effected in June 2010 and June 2011," Mukherjee said.

The Minister also said that the outlook for crude oil prices in the near future was uncertain given the geopolitical situation in the Middle East and North Africa region. "In any case, the likelihood of oil prices moderating significantly is low," he added.

Given the economic performance of the last three fiscals, Mukherjee exuded confidence that India can maintain the growth rate of 8.5 per cent achieved last year, and keep the momentum going in the years to come.

"Our GDP growth rate lowered to 6.8 per cent in 2008-09 but the economy rallied back with an 8 per cent growth in 2009-10 ... The overall GDP growth in 2010-11 was estimated at 8.5 per cent and there is no reason why this momentum cannot be maintained in fiscal 2011-12 and improved further in the coming years," he said.

Mukjerjee said, however: "We believe that in the long run, high inflation is inimical to sustained growth as it harms investments by creating uncertainty."

The government is trying to bring about a fine balance on adjustment of administered retail prices of petroleum products and on the level of fertiliser subsidy, he added.

Mukherjee also said the administered electricity prices have not moved in line with the significant increase in input prices. "To the extent to which the increase in input prices translates into output prices will influence the inflation dynamics," he added.

The Finance Minister said that there is an urgency in addressing the strong structural component in food inflation, including 'protein inflation', even though the South-West monsoon is expected to be normal.

"There are also some concerns due to elevated global food prices," he added.